My first question would be why did you do this? Was the charge off taken in error? Did your outside auditors bless this reversal?
The practice is not in compliance with GAAP. Payment received on a charged off loan is taken as into the allowance as a recovery.
From the OCC Accounting Advisory Series:
A bank placed a loan on non-accrual status, because the borrower’s financial condition had deteriorated and it did not expect full repayment of contractual principal and interest.
Accrued interest was reversed and, as a result of the bank’s credit evaluation, a charge-off of principal was recorded. However, one year later the borrower’s financial condition has improved greatly, and the bank expects to recover all amounts contractually due.
Question 20: (February 2004)
Can the bank reverse the charge-off and rebook the principal and accrued interest?
No. The decision to place the loan on non-accrual indicates that there was doubt about full collection of principal and interest. The charge-off was based on management’s determination that recovery of the principal was not expected. The reversal of the interest was based on the determination that the accrued interest may not be collected.
Accounting Principles Board Opinion No. 20 (APB 20) indicates that the determination of collectibility is an accounting estimate. APB 20 further requires that changes in accounting estimates be accounted for on a prospective basis. Accordingly, payments would be accounted for in accordance with GAAP, and recoveries recorded as received. This would apply to both principal and interest payments.